Getting Set up in Canada...Investing with a Small Group of people

SFR Investor from Victoria, BC

posted almost 5 years ago

Hi Team,

I have a conundrum. I am trying to figure out how to get started in terms of "What entity will buy this property I am interested in?". I will briefly go over my scope and goals and will propose some options. If you have any feedback please feel free to go ahead.

IntroMy partner, her brother and his fiance are all in a fairly good position employment and debt wise. We want to pool our resources/finances and invest together in real estate. We all get along really well and have all stated we want to do this for the right reasons and do it properly without affecting our family relationship.

What We Have
My Partner's parents own a 35 acre lot in Quebec and they are trying to figure out how to get that in our names so we can try start working on that as one of our first investments.

What We Want on Top
We are looking to invest in a Rental Property (Some rehab would be OK) with short term returns. We are looking at properties in booming towns within the oil/gas/pipeline industry. We are also looking at the possibility of having one or two other properties elsewhere in similar situations. Cashflow is one of our biggest motivations until we sell obviously within 2-4years. After starting this first project we would be looking at doing maybe up to 2-3 at a time but nothing super crazy. We aren't going to quit our day jobs lets just say.

What We Need to figure outWe are trying to figure out how to set ourselves up for
A. being able to acquire the land gifted to us from my parent in laws with minimal tax/cost to them or us
B Being best set up for tax and cashflow on our rental income and the eventual sale of the property.

We want some protection but we also are not into going all out and creating a three tiered company setup if we don't need to. We are in Canada so there are no LLC's. Incorporation is an option but is expensive to setup and maintain if we aren't getting much cashflow.

Shooting from the Hip - Possible Solutions?After doing some research it appears that there are a few options:

QUEBEC PROPERTY
- We could incorporate a company with the 4 of us. Have the Quebec Land transferred into the company name, subdivide the lot and pay for a road to be put in, then sell the lots individually.
- We could create a Family Trust to help transfer the Lot across into our ownership. Not sure of how we or the InLaws could reduce or avoid paying a big old Capital Gains tax payment due to the difference in FMV from initial purchase to transfer. It was inherited by my inLaws over 30 yrs ago so the difference is going to be high.

OIL GAS PIPELINE PROPERTY
- We could incorporate a company with the 4 of us. Building/Rehab expenses could be deducted against the rental income.
- Income earned could be distributed evenly or even reinvested to get another property.

I guess the main questions I was hoping for help on are:

1. Should we Start a Corporation, a Family Trust, both or neither? Advice on multi-person set-ups and their strengths/weaknesses? Advice on Corporations and ways to mitigate risks with liability?
2. Any suggestions for the Quebec subdivision in transferring the property to our name with minimal capital gains?

Sorry for the big long spongey email. I have done a LOT of reading on all these topics but sometimes it just takes one of the clever experienced peeps to bring it all together. I look forward to any and all advice people may have from personal experience or even hearsay. US advice welcome also?

Thanks for the opportunity to spitball here folks, wishing you all a happy Tuesday.

from Fredericton, New Brunswick

You are correct, a multi-tiered corporate organisation may be excessive at this point. That said, you want to have the longer term plan and structure your steps today such that they do not limit your options unduly in the future.

The first thing you need to do write out a brief bullet-list synopsis of your {collective} vision and plan - no need to be overly philosophical here {things will change}, but it is essential that you all be on the same page. Next you will need to pool a bit of your funds and find yourself both an accountant and a solicitor who specialize in real estate - since the land parcel in question is in PQ, you will want your solicitor to be versant in Québec law (it differs from RoC).

I suspect you will be considering a corporation (maybe two) and the real question will be if it could be created/classified as an active/operational corporation {i.e. earning active income from flipping or land development} and not just a passive holding company. As an active corporation you would be eligible for the CCPC small business deduction, both federally and provincially, which would significantly reduce your income tax rate. If a company is deemed the best route, by your advisors, the next question will one of jurisdiction. Should the company be, is it necessary the company be, incorporated in Québec {this would be governed by law and regulation surrounding land ownership} or could/should it be incorporated either Federally or in AB.

Another factor in favour of a corporation - as opposed to a partnership amongst yourselves - is that there are four of you. Your lawyer will ensure you have an encompassing shareholders agreement that deals with all possible avenues of exit for one, or more, of the shareowners - life happens, partnerships dissolve, marriages break down, people want to do other things. You will also want to ask your lawyer if you should have separate classes of shares for all shareowners and/or if each couple should have their own holding company which, in-turn, owns the principal company. All of this will be dependent of the specifics of your situation and the bullet-list vision & plan you collectively prepared.

Trusts are usually not something you would consider starting out and where your in-laws are sitting on a large capital gain, they likely cannot transfer it into a trust without realising a gain - hopefully I am wrong and your team (accountant and solicitor) will know a way it could be done. Depending on the type of land and how they hold the land, it may be beneficial for them to actually develop the land themselves with respect to taxes and capital gains {there is a lifetime capital gains exemption for disposition of CCPC shares in an active corporation and for agricultural land ... you or they should determine if either could be apply, or be made to apply, here.

SFR Investor from Victoria, BC

replied almost 5 years ago

Roy! You are an incredibly helpful clever box full of awesome. Thanks so much for your insight. This is the kind of thing I can't praise Bigger Pockets enough for. Straight to the point, relevant and useful info.

Thank you for taking the time to reply, I am sure these boards can sometimes be filled with more take than give and you are one of the generous ones who is willing to share what you know. I look forward to taking these steps and reporting back on my progress so others in Canada especially can learn from our collective knowledge (And mistakes!).

My Brother in Law lives in Quebec so we are situated quite well to get the ball rolling on what you suggested.

If anybody can suggest a good Real Estate Solicitor or tax specialist or accountant in Quebec or even near Pembroke, Ontario, I would love to hear about it?

Otherwise thanks for the help again Roy. If there is anything I can help with or offer, please let me know?

from Fredericton, New Brunswick

Make certain your plans for the land holding are viable before exerting time and spending money. If developers are constantly banging on your in-law's door, then there is likely a demand. Otherwise consult with local {commercial} brokers and developers and determine the best/highest use for the land and the level of demand. Next see if zoning permits the desired use.

In other words, make certain your business case is solid before jumping in.